Mexico’s energy sector stagnates as AMLO’s counter-reform plays out

Political instability has always been the Achilles' heel of Latin America. Investments in the region have often been jeopardized by governments who make changes to what came before. The energy sector has been particularly affected, as it has been directed by ideological concepts, rather than economic or technical facts.

Mexico is no exception. Two years into the administration of President Andres Manuel Lopez Obrador, also known as AMLO, the energy sector has been completely transformed. Long gone are the upstream auctions that got international attention, making the Gulf of Mexico the most explored area in the world during a few years.

Under a nationalistic banner that puts state oil company Pemex and state utility CFE at the core of the political agenda, his administration has consistently worked to undo a reform passed by his predecessor that allowed for private investments across the energy sector.

In exploration and production activities, the 2013 reform resulted in over 100 exploration and production contracts with more than $41 billion of committed investments. In the power sector, it attracted almost $10 billion through the installation of wind and solar parks that now produce close to 30% of total consumption.

Observers and analysts have pointed out that the attack by the current government has been mostly directed at companies operating in the midstream business or those in the power market, through a spate of new regulation, agreements, and omissions.

The federal government cancelled the long-term power auctions that promoted new plants with the state utility CFE as the offtaker, and the auctions for the transmission lines that would help transport the energy.

It has renegotiated contracts with developers of natural gas infrastructure; modified the rules for fuel imports and exports; and most recently made modifications to the electricity sector law to give priority to CFE over other power producers in the dispatch of electricity.

No legal changes have been made in upstream, but the government has constantly criticized exploration and production companies for not delivering results. This is partly due to high expectations set by the crafters of the energy sector reform, who overpromised on production goals.

The administration of President Enrique Pena Nieto, who passed the reform in late 2013 after sealing a historic truce with the opposition, argued that with the changes made to the constitution, billions of dollars' worth of investments would flow into the country. Mexico's crude production, they claimed, would not only stop declining, but increase to 2.5 million b/d by 2018 and 3.5 million b/d by 2025.

The goal was unrealistic. The current administration managed to stop the decline in 2019, and has kept output relatively steady at around 1.6 million b/d since. However, that has come at a huge cost. In 2019, Pemex reported a net loss of over $16 billion and almost $23 billion in 2020, despite receiving over $17 billion in government support in those two years combined.

The lack of results has been used by the government as proof that the legal framework it has been trying to undo is faulty. The message resonates among a large majority of the population who support President Lopez Obrador. His approval ratings have barely declined, even during the pandemic, although the government's handling of the crisis was criticized by the local business community and abroad. The most recent polls indicate over 60% of the citizens have a positive view of the president and his government.

Analysts and observers have pointed out that his charisma, together with the majority held by his Morena party in both Houses of Congress, could partly explain why he has acted so quickly and firmly against the 2013 reform. Morena, they argue, could lose the majority in the upcoming June elections, making it harder to pass laws.

In June, Mexicans are set to renew both Houses of Congress, elect 15 new state governors, and renew 30 of the 33 local congresses, in the largest election in the country's history.

Permitting at a standstill

But regardless of the outcome of the elections, and the protection companies have received from judges, the consensus view is that the message the government is sending has already had a negative impact on the sector.

The coronavirus pandemic exacerbated what many observers see as paralysis inside government offices. Industry chambers and associations have denounced the fact that no permits have been issued for hundreds of projects, from small power generation plants to new service stations. Regulators including the energy Secretariat (SENER) have effectively blocked the activities of many parts of the industry. Foreign direct investment fell almost 12% in 2020.

According to data from the National Hydrocarbons Commission (CNH), exploration and production companies operating in Mexico invested $5.27 billion in the country during 2019 and 2020, compared to the $9.5 billion they had committed to injecting according to their approved work plans.

Many companies have delayed drilling activities, citing delays caused by the pandemic. Most observers consulted by S&P Global Platts agree companies are trying to do the minimum amount of activities allowed in their contracts.

No upstream contract has been cancelled and no company has left, but no new companies have entered the sector either.

Mexico's negative attitude towards private investment comes at a time when other countries in the region like Argentina, Brazil, Colombia and Guyana, are opening their arms to foreign capital to develop their reserves.

Natural resources are the same everywhere. Investors do not care where the money goes, as long as there are returns.

Mexico has plenty of resources: the geology is not in question. It is the business environment that is broken, and that will take years to fix.